Ma131 Mathematics i Question Bank Question Bank Matrices: Part –a
Case study question bank
Transcript of Case study question bank
Strategy and Management Accounting – Graham Simons Pitcher 1
Case study question bank
Contents
Chapter 1 - Activity 1 – HW Inc. Approach to Strategy ........................................................... 2
Chapter 2 - Activity 2 – HW Inc. Vision and mission ............................................................... 2
Chapter 3 - Activity 3 - HW Inc. environmental analysis ......................................................... 2
Chapter 4 - Activity 4 - HW Inc. Portfolio analysis .................................................................. 3
Chapter 4 - Activity 5 – HW Inc. Customer Profitability Analysis ........................................... 6
Chapter 4 - Activity 6 – HW Inc. Value creation system .......................................................... 8
Chapter 4 - Activity 7 – HW Inc. Financial analysis ................................................................. 8
Chapter 5 - Activity 8 – HW Inc. SWOT analysis .................................................................... 9
Chapter 6 - Activity 9 – HW Inc. Competitive strategies ........................................................ 10
Chapter 6 - Activity 10 - ABC factory-made picnic tables ..................................................... 12
Chapter 6 - Activity 11 - TDABC and call centers ................................................................. 13
Chapter 6 - Activity 12 – HW Inc. Cost of quality .................................................................. 14
Chapter 7 - Activity 13 – HW Inc. International expansion .................................................... 17
Chapter 7 - Activity 14 – HW Inc. Joint development ............................................................ 19
Chapter 7 - Activity 15 – HW Inc. Growth strategies ............................................................. 21
Chapter 8 - Activity 16 – HW Inc. Investment appraisal and stakeholders ............................. 24
Chapter 8 - Activity 17 – HW Inc. Investment appraisal ........................................................ 27
Chapter 9 - Activity 18 - HW Inc. Strategic implementation .................................................. 28
Chapter 10 - Activity 19 – HW Inc. Balanced scorecard ........................................................ 29
Chapter 10 - Activity 20 – HW Inc. Critical success factors and performance management . 32
Chapter 10 - Activity 21 – HW Inc. Economic value added ................................................... 35
Chapter 10 - Activity 22 – HW Inc. Transfer pricing .............................................................. 37
Chapter 10 - Activity 23 – HW Inc. Benchmarking ................................................................ 39
Chapter 10 - Activity 24 – HW Inc. Divisional performance RoI and R.I. ............................. 40
Chapter 11 - Activity 25 – HW Inc. Sustainability .................................................................. 42
Chapter 11 - Activity 26 – HW Inc. Sustainability and the accountant ................................... 45
https://managementaccountingandstrategy.com/ 2
Chapter 1 - Activity 1 – HW Inc. Approach to Strategy
This activity refers to the case of HW Inc., described in Appendix A of this learning resource.
Read sections A1 to A8 to familiarize yourself with the case. Then focusing more on
sections A5 – A8, determine whether you think that HW Inc. has adopted a rational approach
to strategic management? Do you believe that HW Inc. is taking an outside-in or an inside-out
approach? Is there any evidence of emergent strategies? Give reasons for your assessment
citing evidence from the case study information.
[Note: There is no one right answer to these questions as there is often a degree of
subjectivity in how the information is interpreted. It is important, therefore, that you adopt the
practice of justifying your views with supporting evidence.]
Chapter 2 - Activity 2 – HW Inc. Vision and mission
Turn to Appendix A of this learning resource, read the section A1 and attempt the following
activity.
• Evaluate the vision, mission, and values statement of HW Inc. (Hint: use the
framework by Campbell et al. (1990) or that of Lynch (2003) from section 2.3)
• What does this imply for the management accounting information requirements of
the management team at HW Inc.?
Chapter 3 - Activity 3 - HW Inc. environmental analysis
Turn to Appendix A of this learning resource, read sections A.2 – A.3, and attempt the
following activity.
(a) Using the frameworks of PESTEL and Porter’s five forces model, undertake an analysis
of the business environment in which HW Inc. is currently operating.
(b) What do you think are the key challenges facing HW Inc?
(c) Critically evaluate how the management accountant of HW Inc. can contribute to the
activity of environment analysis.
Strategy and Management Accounting – Graham Simons Pitcher 3
Chapter 4 - Activity 4 - HW Inc. Portfolio analysis
Boston Consulting Group portfolio analysis
Reece Jones, one of the independent members of the senior management team, has suggested
that HW Inc. could use the Boston Consulting Group matrix to help assess its strategy at both
company and store level. You have been asked to illustrate how the analysis could aid decision
making about products and product groups within the company.
You have done a quick analysis and accessed the following information with which you
could illustrate the principle behind the BCG portfolio analysis and how it might be used to aid
decision making.
HW Inc. sells goods and services that can be categorized as: Home and Garden, Clothing,
Electricals, Interior Design, and Financial Services.
You have worked closely with the marketing team at head office and ascertained that the
sales of HW U.S., in relation to the total market, for the various categories in the U.S., is as
shown in Table 4.4.
Table 4.4 Market share and market growth information
Category of goods
and services
HW market share
%
Market share of
nearest competitor
%
Market growth rate
%
Home and Garden 15% 10% 12% - beginning to
slow
Clothing 7.5% 10% 5% - and continuing
at similar levels
Electricals 5% 4% 7% - but becoming
highly competitive
Interior Design 2% 8% 30% - growth is
linked to a trend
among middle-aged
couples
Financial Services 1% 5% 20% - looks as if this
will continue, but
the sector could
become subject to
increased
government
regulations
Other information provided on business units is as follows.
https://managementaccountingandstrategy.com/ 4
HW Inc. retail stores
The retail stores have not been as profitable in recent years as the market has become extremely
competitive, and customers are becoming more sophisticated and demanding in their
expectations. One way in which HW Inc. has attempted to compete is always to offer the latest
products. This makes inventory obsolescence an issue. Judging the amount of inventory to hold
to satisfy customer demand, without having massive inventory write-offs, can be difficult.
Inventory management is a problem in the clothing market where products are seasonal, for
example, summer range, winter range, and so on. This sector is also heavily influenced by the
latest fashions. However, a new inventory management system is helping with the problem.
The growth of the ‘click and collect’ service is working well and, along with online sales, is
set to grow in the future in all product groups.
The use of concessions (companies that effectively rent space in the HW Inc. stores) also
enables HW Inc. to provide a wide range of products to its customers. HW Inc. plans to try and
increase the number of concessions in the next few years as it shares some of the risks between
the partner companies. However, HW Inc. does not want to diminish the HW brand as they
also plan to continue to develop and sell their “own brand” products. They also wish to retain
their manufacturing capability as this provides a useful diversification from retailing and
enables more control over the quality of certain product lines in which they have a
manufacturing capability.
Clothing sales have been slowing in recent years, but the furniture sales are strong. The
electrical goods market is competitive, particularly the audio-visual and kitchen aids ranges.
The increased competition in the specialist electrical goods retailers has also hit the
departmental stores such as HW Inc., along with the need always to offer the latest products
highlighting the need for proper inventory management.
HW Inc. Interior Design
HW Inc. Interior Design has a range of corporate clients as well as retail customers. The design
team copes with a variety of projects from single room design such as kitchen design for
residential customers, to working with property developers and architects on both commercial
and residential large-scale projects. They source products used in their designs from HW Inc.
and a large number of other companies. They have a significant degree of autonomy over which
products to recommend and are not necessarily tied to HW Inc. However, they always consider
HW Inc. products and recommend them where they are suitable.
Dealing with several other companies helps the HW Inc. research and development team,
who look after the HW Inc. product range, as the Interior Design division can gather and
feedback information about the products of other manufacturers, and also customer trends. The
Interior Design team are keen to expand their business and are looking to increase the number
of corporate clients. In particular, they plan to target the state-owned and education sectors
over the next few years. To do this, they will need to expand their design team and recruit
additional staff with appropriate experience in those sectors.
Strategy and Management Accounting – Graham Simons Pitcher 5
HW Inc. Financial Services
The Financial Services division is seeking to increase the number of credit card customers over
the next few years and is also planning to diversify into insurance products. The division
already offers extended guarantees and insurance on products sold in the HW Inc. stores,
particularly on electrical goods, such as fridges, washing machines, TVs, and computers. The
management team is thinking of expanding into life insurance, travel insurance, car insurance,
and home and contents insurance. It is a competitive market, but they believe that the volume
necessary to breakeven on these products could be achieved if they can attract existing HW
Inc. customers and build on the reputation of the HW brand. This will then provide a stable
platform on which to expand the business in the future.
More recently, they have seen the administration costs increase, and the management team
have highlighted this as an area where improvements could be made, perhaps via a
benchmarking exercise. They also recognize that an increase in business will require an
increase in qualified staff, and by adding a range of new products, it will create the need for
additional training of the existing team.
HW Inc. product development and manufacturing
This division has seen material costs increase in recent years, and they are looking at the
supplier relations to see if any savings can be made on the cost of materials. The division does
not see a significant increase in business over the next few years but is seeking to maintain
volumes at existing levels to retain the manufacturing capability, and within this to keep the
product range up to date. This means replacing existing product designs with more up to date
designs rather than developing entirely new product ranges. They see the next few years as
being a consolidation of the division. Control of costs will be essential, and reviewing
manufacturing methods is seen as part of that process, but they do not intend to spend a lot of
new capital investment in plant and equipment. They feel that there is scope to improve in areas
such as waste management, energy costs, productivity, and inventory management.
Activity requirements:
(a) Critically evaluate the usefulness of using portfolio analysis, such as the Boston Consulting
Group (BCG) matrix, in developing strategies to manage diverse organizations such as
HW Inc.
(b) Using the BCG matrix, analyze and comment on the portfolio of products and markets in
which HW Inc. operates.
(c) Briefly outline the financial controls that could be used to monitor and assess products in
each category of the BCG.
https://managementaccountingandstrategy.com/ 6
Chapter 4 - Activity 5 – HW Inc. Customer Profitability Analysis
HW Inc. has found that a successful strategy of entering new markets and establishing the brand
name is via mail-order or online catalog shopping. This keeps overheads low while building
the brand and testing the market before opening high street stores. HW Inc. adopted this
strategy in some areas of Africa by marketing clothing and accessories via a catalog and flyers.
This worked reasonably well, and several stores have since been opened, but the mail-order
side of the business is still quite strong. However, the operations director has become concerned
about the growing marketing, distribution, selling, and administration costs of this activity.
The management team of HW Africa examined its customer ordering patterns for the past
year and identified four different types of customers, as illustrated in Table 4.5. Much of the
marketing is based around sending catalogs and flyers to all its customers several times a year.
Orders are taken by mail, over the telephone, and more recently online. However, because of
poor internet services in some areas, phone and mail orders are still used by a large number of
customers. HW Africa maintains a Freephone number for customers to use when placing orders
over the telephone, and, in keeping with its customer service promise, HW Africa prides itself
on the personal attention it provides shoppers who order over the phone. All purchases are paid
for by cheque or credit card. HW Africa has a very generous return policy if customers are not
satisfied with the merchandise received. Customers use a pre-paid delivery service to return
their unwanted items, which is paid for by HW Africa.
For ease of calculation, costs shown in Table 4.5 are provided in $ amounts, but the local
currency applicable to the specific country is quoted on the local websites.
Table 4.5 Sales and costs to serve for different types of customer
Customer
type 1
Customer
type 2
Customer
type 3
Customer
type 4
Customer
type 5
Initial sales $1,000 $1,000 $2,500 $3,000 $1,500
Number of items
returned
0 4 2 14 2
Dollar value of items
returned
0 $200 $500 $1,500 $250
Total number of orders
per year – note each
order is delivered
separately
1 6 4 12 2
Analysis of the total number of orders by type
Number of telephone
orders per year included
in total
1 0 0 12 0
Number of mail orders
per year included in
total
0 6 4 0 0
Number of online
orders per year included
in total
0 0 0 0 2
Strategy and Management Accounting – Graham Simons Pitcher 7
Table 4.5 continued
Customer
type 1
Customer
type 2
Customer
type 3
Customer
type 4
Customer
type 5
Average time spent on
dealing with each phone
order from customers;
that is, time per order
15 mins 0 0 5 mins 0
Number of special
deliveries
1 0 0 12 0
Number of regular
deliveries
0 6 4 0 2
Prices are set so that the cost of goods sold is, on average, about 75% of the sales price.
Note that returns are made at full sales value, so the cost of goods applicable is based on net
sales, that is, initial sales less returns. HW Africa pays for the delivery costs of items (a small
amount is built into the price of the product to cover the cost of deliveries), so delivery is free
to the customer. Standard delivery is within 3 or 4 working days. However, if customers request
a next day delivery or a weekend delivery, HW Africa makes a charge to the customer
equivalent to the additional cost incurred. That is, HW still pays the standard delivery cost, but
in these cases, any extra cost charged by the courier is passed on the customer. However, HW
Africa does still incur an additional processing charge for arranging the special delivery.
HW Africa has developed the activity cost driver rates, shown in Table 4.6, for its support
costs:
Table 4.6 Cost driver rates for costs to serve
Activity Activity cost driver rate
Process mail orders $5 per order
Process phone orders $80 per hour
Process online orders $0.5 per order
Process returns (includes the cost of pre-paid
postage)
$15 per item returned
Standard delivery costs (incurred by HW
Africa on all deliveries)
$10 per delivery
Additional administration cost to arrange
special delivery, that is, costs on top of
standard delivery costs
$4 per request
Maintain customer relations (send catalog
and respond to customer comments and
complaints)
Best estimate of $50 per customer per year
Activity requirements:
(a) Using activity-based costing, determine the yearly profit associated with each of the five
customers described.
(b) Comment on which customers are most profitable and why.
(c) What advice do you have for HW Africa regarding managing customer relationships with
the different types of customers represented?
https://managementaccountingandstrategy.com/ 8
Chapter 4 - Activity 6 – HW Inc. Value creation system
Using the information in the case study related to the operations and the factory unit (section
A.6 and A.7), undertake a value creation system analysis for HW Inc. It may be helpful to
consider the retail outlets and the factory separately, that is, illustrate using separate value
creation system diagrams, as shown in section 4.9.
Chapter 4 - Activity 7 – HW Inc. Financial analysis
HW Inc. is undertaking a review of its future strategy and has obtained figures relating to the
industry average in terms of the financial ratios, shown in Table 4.7.
Analyze the financial performance of HW Inc. based on the figures provided in Appendix
A (section A.8 and Exhibit A) of the case study – the income statement (profit and loss account)
and balance sheet for HW Inc. and compare your analysis with the industry average provided.
What are the trends arising from the analysis of HW Inc.? What messages does this provide
for HW Inc.’s management?
Is there anything in Exhibit B of the case study that the management of HW Inc. should
consider?
What other aspects of performance would you investigate?
Table 4.7 Financial ratios for the industry average
Financial ratio Industry
average
Gross profit percentage of revenue 30.5%
Operating profit percentage of revenue 2.5%
Return on net assets (profit for year/net assets) 3.5%
ROCE - operating profit as percentage of capital employed (operating
profit/long term borrowings plus equity) 6.2%
Asset turnover (sales revenue/long term borrowings plus equity) 2.5
Non-current asset turnover (sales revenue/non-current assets) 3.0
Gearing percentage (long term borrowings/equity) 40%
Current ratio (current assets/current liabilities) 2.0
Stock turnover (inventory/cost of sales) *365 = number of days stock held 100 days
Receivable days (trade receivables/revenue) *365 = average days to collect 75 days
Payable days (trade payables/cost of sales) *365 = average days to pay suppliers 90 days
Strategy and Management Accounting – Graham Simons Pitcher 9
Chapter 5 - Activity 8 – HW Inc. SWOT analysis
The following activities relate to the case study in Appendix A of this learning resource.
(a) Undertake a SWOT analysis for HW Inc. (Hint: Use the environmental analysis
undertaken from the activity in Chapter 3 and the portfolio analysis, value creation system,
and financial analysis activities in Chapter 4 of this learning resources to help you).
(b) Identify what you consider to be the main elements within each heading; that is, the key
strengths, weaknesses, opportunities, and threats.
https://managementaccountingandstrategy.com/ 10
Chapter 6 - Activity 9 – HW Inc. Competitive strategies
The senior management team (C-suite) at HW Inc. is becoming concerned about the decline in
profits of its business unit in Italy. They have asked the Managing Director of the Italian
business to provide a full report outlining the reasons for the decline and a suggested strategy
to improve HW’s performance in the country for the next year.
While they were waiting for the formal report, the Finance Director at HW Head Office
had reasons to contact the Managing Director of HW Italy about another matter but raised the
issue of the declining profits. He made some notes during the conversation. One aspect that
interesting him is that the problem appeared to be focused on the Furniture and Interior Design
section of the business.
The Managing Director was adamant that the electrical, clothing, and financial services
parts of the business were all very profitable but that the furniture section has been hit hard by
a new entrant to the market who was undercutting prices. An existing major competitor had
responded by matching prices and increasing its marketing expenditure on furniture
promotions. The furniture market in Italy had become intensely competitive in recent years as
independent manufacturers and retailers had fought against the large chain stores gaining
market share. The focus of competition in recent years has been on price. Italian consumers,
although they were quite sophisticated in their tastes, were also prepared to shop around for the
best deal.
There appeared to be different opinions within the local management team at HW Italy.
The Marketing Director was suggesting that HW Italy should match the new entrant and the
competitor move and promote furniture sales and reduce their prices to match. This proposal
was based on the idea that the increased volume sales would generate the increased margin to
pay for the advertising and increased overall profits and that the new entrant would be forced
out of business, restoring the market to the usual competitor companies again. The new
competitor was selling a basic design of furniture marketed under the slogan, “Quality at low
prices.” HW Italy was offering a wide range of furniture units of good quality with some
leading brands, as well as the HW's own brand. Although HW offered a wide choice of product
range, the difference was in style rather than the price, that is, units were of a similar price
bracket and sales each year were reasonably consistent in terms of the mix of units sold.
The Operations Director felt that the production cost of the furniture was too high for them
to compete and that they should reduce the inventory items of furniture and move the focus
more towards clothing and electricals. The cost of the HW branded furniture that was
manufactured in the HW U.K. factory and shipped to Italy had increased due to the fluctuating
exchange rate against the Euro in recent months, and this would only reduce margins even
more. Also, the cost of other branded furniture that was sold in the retail stores had increased
from their suppliers.
The Interior Design services business, however, was good as they consistently made a net
profit of 15% of sales revenue. The suggestion from the Operations Director was to reduce the
number of furniture ranges offered for sale, perhaps limiting it to a small range of quality styles
sold under the HW brand, and promote the Interior Design services. He illustrated his point
by commenting that the manager of the Interior Design team had noticed a marked shift in
Strategy and Management Accounting – Graham Simons Pitcher 11
kitchen design that customers were not only looking for a good deal but also looking for
functionality with style.
He criticized the Marketing Director’s suggestion on the basis that it would reduce HW to
a strategy of cost leadership, which would be bad for the image of the company, whereas
differentiating on quality and service would enhance this part of the business, and give it an
edge in the market. The manager of the Interior Design team is confident that they could
increase their sales of design services if they were able to offer a product range that fitted more
neatly into the functionality with style category.
The Managing Director said the management team was preparing a detailed report and that
they would forward this as soon as they were able.
During the conversation, the Managing Director had read out some figures relating to the
kitchen units sold and the Interior Design business generated from kitchens, which the Finance
Director of HW head office had jotted down. He has provided the information above, and the
figures are shown in Table 6.21. He has asked you for an initial opinion on the implications of
the two suggestions.
Table 6.21 Indicative figures from the kitchen section
Year
Total number of
Kitchen Units
sold
Sales Value of
Kitchen Units
Interior Design
Sales revenue
generated from
Kitchen design
Operating profit
generated from Kitchen
Units and Design
together
€m €m €m
2018 2,050 922,500 650,000 162,000
2019 2,700 1,080,000 600,000 144,000
2020 3,600 1,260,000 550,000 107,500
Note: Profit from Interior Design services usually is 15% of the sales value generated from
Design. The Interior Design services part of the business is not restricted to selling HW branded
goods but can select any kitchenware products from the range of manufacturers that HW stocks.
All the kitchen units are of a similar size – the design aspect comes from selecting
appropriate units that are joined to create the desired kitchen, for example, base units, corner
units, wall units.
Activity requirement:
(a) Using the numerical information provided in Table 6.20, investigate whether a strategy of
cost leadership is a viable option for HW Italy.
(b) Based on what you know about HW Inc. and the information provided by the Finance
Director recommend, with justification, a suitable competitive strategy that HW Italy could
adopt. Also, highlight any additional information or analysis that you think should be
undertaken before a final decision is made.
https://managementaccountingandstrategy.com/ 12
Chapter 6 - Activity 10 - ABC factory-made picnic tables
The furniture factory based in the U.K. has traditionally used a single rate of overhead recovery
based on the number of units it has produced. The head office finance department has requested
that they review whether they should adopt activity-based costing. They have ascertained the
following information about two of their most popular ranges of a picnic table. They are
planning to use this as an illustration of the benefits of ABC. The factory ‘sells’ the products it
manufactures to the retail store division and usually adds a mark-up of 25% to the furniture
products it makes. The accounting team has provided the information shown in Table 6.22.
Table 6.22 Basic data on picnic tables (figures provided in $)
Product Alpha range Beta range
Output in units 12,000 14,000
Costs/cost drivers
Direct materials in total $240,000 $350,000
Direct labor in total $168,000 $147,000
Total machine hours 2,100 2,400
Orders executed 150 110
Number of production runs 90 40
Number of shipments 50 15
Number of product returns from retail stores or
regional depots
90 40
The production overhead is currently absorbed by using units, and the total of the production
overhead for the period has been analyzed as shown in Table 6.23
Table 6.23 Analysis of production overhead related to picnic tables product
Activity pools Annual costs
$
Cost driver
Production overheads 180,000 Machine hours
Material handling 78,000 Orders executed
Quality enhancing and inspection 130,000 Number of production runs
Delivery 26,000 Number of shipments
Production return management 15,000 Number of returns
Total 429,000
Activity requirement:
(a) Calculate the selling price based on the current traditional method and using the ABC
approach.
(b) How does this aid the decision making of HW’s management team?
Strategy and Management Accounting – Graham Simons Pitcher 13
Chapter 6 - Activity 11 - TDABC and call centers
HW Inc. sells many product lines within its stores and prides itself on customer service. Product
lines are looked after by product line managers. Typically, a product manager will take
responsibility for liaison with everything about that product line or product group within the
stores. They operate on a national basis, that is, a manager is responsible for a product group
within all stores in the U.K. A product group could be health and fitness products, audio-visual
products, kitchen products, lighting products, and so on. For small product groups, a manager
might look after more than one group.
HW Inc. currently operates a central service call center that deals with customer calls for
information and complaints. The costs of the call center are presently allocated based on 10%
of the sales value of the product groups.
The manager of product Y is upset because he has just received a report, Table 6.24,
showing the following information relating to the year 2020.
Table 6.24 Information for product group X and Y
Product group X Product group Y
Number of calls for information 5,000 2,000
Average length of call for information 10 minutes 6 minutes
Number of calls registering complaints 1,500 300
Average length of complaint calls 12 minutes 6 minutes
Sales volume $200,000 $800,000
Product group Y contains products that are simple to use, and consumers have little concern
about adverse health effects. Product group X includes products that are more complex to use
and have quite a few health hazard warnings on their labels and in their instructions for use.
The manager of product group Y argues that the current system is unfair as it does not trace
call center usage direct to products. For example, product group Y bears four times the cost of
group X, although group Y has far fewer calls associated with it and consumes less time.
(a) What activity cost driver would you recommend to improve the current system of
assigning call center costs to product groups? Why is your method an improvement?
(b) Suppose that HW Inc. decides to allocate costs using an activity-based method and chooses
the basis of minutes of calls as the activity cost driver. Suppose the average cost of
handling a call is $1 per minute. Compare the costs incurred by product group X and Y
under the new system and the old.
(c) What actions can the product managers take to reduce the number of calls received by the
call center? What might other functional areas of the business do to help reduce the number
of calls per product?
(d) Who might resist the implementation of the new activity-based cost system?
(e) From HW Inc.’s point of view, how might the ABC system and the value creation system
help in the assessment of whether to outsource the call center activities?
https://managementaccountingandstrategy.com/ 14
Chapter 6 - Activity 12 – HW Inc. Cost of quality
Furniture from HW Inc. Guildford store
The following letter was red-flagged and created a major alert at the HW local retail store and
the management team of HW UK, who is demanding an immediate investigation into what
went wrong and what was going to be done to stop it happening again.
Dear Sirs,
In December, I purchased a new house ready to begin working at my new job in Nottingham
in January.
On the last Saturday in December, I decided to go shopping at one of your stores in the
town where I currently live in Guildford, Surrey. I decided I would need a new dining table
and chairs, sofa and armchair, as my current furniture had seen better days.
I arrived in the furnishings department in your Guildford store at 9:10 a.m. to beat the rush.
I wondered around the department sitting on chairs, sitting on chairs at various dining room
tables, sitting on sofas and armchairs, and looking through material sample books for 20
minutes before deciding to go off in search of an assistant. At the ‘Pay Here’ desk, I found
someone and asked if anyone was available to help in the furnishings department.
‘I could find someone for you,’ the assistant replied with a degree of reluctance.
Someone was found – a person I had previously seen walking through the department
several times. They very kindly offered to help and began to take my order. It took about 15
minutes to place the order on the computer system, which included several aborted attempts to
find the order code for the items I required. I was left feeling not hugely confident that the
goods I was purchasing had been processed correctly. I was informed that all the furniture had
to be made to order and would take about six weeks to arrive.
When it came to paying, I had to go to the pay desk. A different assistant asked if I had an
HW Inc. credit card, as this would allow me a 10% discount. I replied No, so I was persuaded
to apply for an HW Inc. credit card to benefit from the discount. The application was processed
at the till, credit check performed, and card granted. It took about 10 minutes as a manager had
to be found to authorize the application. As the order for the sofa and armchair, and dining
table and chairs came to more than $1,000 – the limit allowed on a new card application, I was
told I could put $1,000 on the new card, which I duly did, and used my HSBC card to pay the
balance – they very kindly allowed the 10% discount on the entire purchase. I was also
persuaded to take out insurance offered with HW Inc.'s credit card costing $3 to protect the
purchase. It was then automatically added to the HW Inc. credit card bill.
Two weeks later I received a telephone call saying that the supplier of the sofa had a
problem with their supplier of cloth, and it would take another three weeks for the furniture to
be made. I would be contacted when it was ready.
One week later, I received a letter from the legal department of Visa Card Services. They
apparently manage the credit card for HW Inc., telling me that the card was overextended by
$3 and unless this was cleared immediately, it would be stopped and legal action taken to
recover the debt. The letter also informed me that the account would be charged with $15 for
Strategy and Management Accounting – Graham Simons Pitcher 15
the administration costs. As the insurance had been charged to the credit card automatically,
the total charged to the card was $1,003. It seems to me to be unreasonable as it was an error
on the part of the store employee. I have written to Visa Card Services explaining the situation
and have paid the $1,000 and suggested any additional charges be reclaimed from HW Inc. I
have also asked Visa Card Services to cancel the card with immediate effect.
I also received a letter saying that my dining room table and chairs would be delivered on
21st January. There was a contact phone number to use if the date were inconvenient; if
however, no communication was received, it would be assumed that the date was acceptable. I
telephoned to arrange a more convenient date.
When the dining room table and chairs were delivered, the chairs were of a slatted back
version, and not leather-backed, as had been ordered. The delivery staff were unhelpful,
commenting that they had never delivered any leather-backed chairs with that style of table
before and did not think that the company sold them. They did, however, leave the incorrect
chairs so that I could sit down and suggested that I contact their administration office.
I contacted HW Inc., who said that the supplier was at fault and gave me a number to
contact the supplier. I contacted the supplier and was told that the wrong chairs had been
loaded on the van - I would be contacted with another delivery date. After two days, I contacted
them again and spoke to a different person, and this time I was told the chairs were being made
for me.
Four weeks later I received a letter saying that the chairs would be delivered on 3rd March.
I telephoned again to say that the date was inconvenient – ‘Thank you – I will cancel the
delivery,’ the girl answered and put the phone down. I wrote to you to lodge a complaint stating
that if they were not delivered before the end of March, I would cancel the order, demand the
return of the money, and purchase chairs from another source. No response was received. But
I did receive another letter with another delivery date for 24th March – I rearranged work to
enable me to be at home when they arrived. The chairs were delivered on that date, and the
delivery staff kindly took away the incorrect chairs and left the new ones in their place.
On 16th March, I was contacted by HW Inc. to say that the sofa and the armchair were
ready and that a delivery date could be arranged. You were unable to deliver them on 24th
March, when I had arranged to take a day off work to take delivery of the dining chairs, but a
date was arranged for April.
When the sofa and chairs were delivered in April (I had taken another day off work so that
I was at home when they were delivered), the chairs were fine, but there was a snag on the sofa,
which was very visible as it was on top of the backrest. The delivery driver noted this and
advised that they would leave the sofa but that I should contact the administration office to see
what they could do about replacing the sofa.
As the delivery van was driving away, and I was picking up the phone to contact the
administration office, I noticed that there was also a mark on one of the seat covers that looked
like oil. I pointed this out when I was in contact with the office. The lady from the office was
very apologetic, and I was told that the sofa would be replaced. However, the next day I was
told that the headrest element could be replaced but that I would have to pay for the seat cover,
as this was not recorded on the delivery document as being at fault.
I would now like my money back for the sofa and matching chair, and you can collect the
sofa and chair at your earliest convenience.
https://managementaccountingandstrategy.com/ 16
I look forward to hearing from you and thank you in advance for your kind assistance in this
matter.
Yours faithfully
V. Annoyed Esq.
Required
(a) What are the problems or failures in the above scenario, and how could they be overcome?
(b) What are the costs for the company associated with the scenario outlined above?
Strategy and Management Accounting – Graham Simons Pitcher 17
Chapter 7 - Activity 13 – HW Inc. International expansion
HW Inc. to expand to a new country
HW Inc. is planning to increase its business in emerging economies. The management team
has identified Bangladesh as a potential country in which to open stores. Bangladesh is set to
be one of the top three fastest growing economies in the next few years. The country has a
robust financial sector, and one of the key industries is textiles, which is also a significant
export of the region. Its economy has grown on the back of exports of readymade garments.
Manufacturers in the region supply clothing to discount companies such as Matalan. The Head
Office team has identified the following information about the country.
The population is growing and are becoming more sophisticated consumers. The
government-backed growth in telecommunications and technology within the country is
fueling the growth of online shopping. Bangladesh is strategically important to the region as
its seaports provide access to landlocked regions and countries such as Northeast India, Nepal,
and Bhutan. China also sees Bangladesh as strategically important as it allows for a potential
gateway to Tibet, Sichuan, and Yunnan.
The government of Bangladesh welcomes investment from foreign companies. It is keen
to increase the competition in key industries in the country as a way of improving the economic
growth of the country. More than 26% of the population live below the poverty line, so the
government is keen to grow the economy and support local industries. Textiles and apparel
manufacture are among the key employment industries. Unemployment in the country is about
5%, but many only work a few hours a week. There can be some bureaucracy to be overcome
when setting up in business, and supply arrangements are not always as transparent as one
might like. Still, generally, the prospect is particularly good for the U.K. and U.S.-based
companies. The U.K. Government Export Office suggests that opportunities exist for
companies offering quality, lifecycle costs, and after-sales service. Low-cost goods from China
and India dominate the market, and as such, the market is very price sensitive.
The Bangladesh economy relies heavily on human resources, and the government is keen
to promote education – approximately 20% of the total population (around 29 million people)
are students.
Companies such as the International Homeware Company have recently opened stores in
Dhaka and is reported to be doing exceptionally well with very favorable reviews on Facebook.
It is usual to appoint a local representative or local agent who understands the regulations
and market when setting up a business in Bangladesh. The general advice is that working with
a local partner is beneficial, as it is possible to set up an office to sell products and equipment
to the end consumer. It is a requirement to register with the Bangladesh Investment
Development Authority, and the Register of Joint Stock Companies. The local team suggests
that it will be possible to open a store in Dhaka. They estimate that it will take approximately
one year to gain the necessary permissions and establish the store, and trading would be able
to begin in the second year.
https://managementaccountingandstrategy.com/ 18
Activity requirements
Using the model of Porter’s Diamond outlined in section 7.5, assess whether Bangladesh is a
viable option and one that HW could pursue. Also, identify any other aspects or areas of
information that you feel HW should investigate before making a final decision.
Strategy and Management Accounting – Graham Simons Pitcher 19
Chapter 7 - Activity 14 – HW Inc. Joint development
HW Inc. expands into out-of-town stores in China JV
HW China is currently planning to expand its operations in the country. As in most countries,
the trend towards out-of-town shopping is still popular and, in some cases, this is being
supplemented by ‘Shopping Villages’. These are out-of-town single-story retail outlets where
consumers can buy discounted top-quality brands. Luxury goods retailers have embraced the
concept and are using them to sell old product lines that have been replaced in their high street
stores. The shopping villages give consumers who are less wealthy the chance to buy luxury
goods, and the retailer an opportunity to dispose of surplus stock and end-of-season product
lines.
The Shopping Villages tend to be managed by their owners and management companies,
who operate the sites quite aggressively in that they offer short term leases and can change the
mix of companies represented depending on current trends. This practice, however, can be
quite attractive to retailers where high street leases are typically much longer, so the Shopping
Villages offer a lower risk in which to test the market. HW China has operated a small outlet
in a Shopping Village near Beijing, which has shown some promise.
The short term lease is coming up for renewal, and HW China is now investigating the
opportunity of closing the small store in the Shopping Village and opening a slightly larger
store, more in line with an ‘out-of-town’ store, on a nearby site in the same area. To minimize
the risk, HW China is considering entering into a joint venture agreement with a major food
retailer. It is felt that this choice of partner would not pose a direct threat to HW China, as the
product ranges are complementary but do not directly compete.
However, some of the luxury brands that HW Inc. stock such as Burberry, Prada, Amani,
Abercrombie & Fitch, and Hugo Boss were not very happy with the fact that HW China had
opened a small store in the Shopping Village, as these major brands have their own outlets in
Shopping Villages. The “gift” culture in China means that these brands do very well in
Shopping Villages where goods can be discounted by anything between 30% – 70%. These
brands, therefore, see Shopping Villages as an excellent way to expand their consumer appeal
outside of the large high street stores in which their goods are available. They are not happy
about the prospect of HW China opening an out-of-town store, as they feel that this will confuse
the consumer. In retaliation, they have indicated that they may not allow their brands to be sold
in the out-of-town store.
HW China is keen to see the development approved as they are aware that at least two of
their main competitors have opened up small scale stores in Shopping Villages on the fringes
of major cities, so they are also testing the out-of-town market. The local government is keen
to see the development go ahead, but there has been some opposition raised from the local
community. Also, an agreement has been reached to established public transport links to
service the operational superstore, but transport providers are now saying that as people will
most likely travel in their cars to the site, they are no longer prepared to maintain the planned
frequent services due to estimated low demand.
https://managementaccountingandstrategy.com/ 20
The central government has expressed concern recently about the impact that the growth
in out-of-town stores and Shopping Villages is having on the high street and city center shops.
It has commissioned research into the social impact of out-of-town shopping to report within
the next six months. HW China has made no firm commitment yet other than to undertake a
feasibility study with the Joint Venture Company.
Activity requirements:
(a) Identify the market opportunities and threats that confront HW China if it adopts a strategy
of developing more out-of-town stores in the future.
(b) Undertake a stakeholder analysis concerning the strategic decision to open the out-of-town
store on the fringes of Beijing.
(c) Discuss the merits and drawbacks for HW China of pursuing out-of-town developments
entirely on its own or as a joint development with other retailers. Pay special attention to
the practical aspects and operational difficulties which may arise.
Strategy and Management Accounting – Graham Simons Pitcher 21
Chapter 7 - Activity 15 – HW Inc. Growth strategies
HW Inc. diversification into telecoms
Introduction
The senior management team has been investigating the possibilities of diversifying its
activities. They have looked at supermarkets and other retailers that have successfully
diversified into telecommunications and media, such as Amazon, Tesco, Virgin, and other
major companies with the provision of the mobile phone and then into more media-related
activities.
Caroline Quinn (Marketing Director of HW Inc.) has a contact in the media sector that has
put HW Inc. in touch with a medium-sized telecommunication company that has ambitious
plans to develop the company internationally, as well as to diversify into other areas of media
such as TV. XYZ Inc. is looking for a friendly partner to help finance the expansion and would
be open to talks about a possible partnership. Caroline Quinn, Shirley Valentine (Finance
Director of HW Inc.), and Huang Zu (International Development Director at HW Inc.) have
had an initial meeting with the Chairman and the Chief Executive Officer of XYZ Inc. At the
meeting, the Chief Executive Officer of XYZ Inc. enthusiastically outlined the company’s
plans and seemed very keen to sell the idea of a partnership arrangement to HW Inc. One of
the attractions for XYZ Inc. was to be linked to a company such as HW Inc. that had global
recognition across six continents. The following is a brief outline of the background and plans
of XYZ Inc.
XYZ Inc.
XYZ Inc. is a well-established company providing telecommunications services both
nationally and internationally. Its business has been concerned with the provision of telephone
lines and equipment and private telecommunications networks. XYZ Inc. has supplemented
these network services by offering mobile phones, which, although highly competitive, is still
an expanding market worldwide.
The company maintains a diverse customer base, including residential users, multi-
national companies, government agencies, and public sector organizations.
Strategic development
The Chairman of XYZ Inc. stated within the latest Annual Report that there were three main
areas in which the company aims to develop to remain a world leader in the
telecommunications market. He believes that the three main growth areas reflect the evolving
nature of the telecommunications market and will provide scope for development.
The areas in which development is planned are:
1. Expansion of the telecommunications business in the national and overseas markets,
both by the company acting on its own and through partnership arrangements with other
suppliers.
https://managementaccountingandstrategy.com/ 22
2. Diversification into television and multi-media services, providing the hardware to
home entertainment and enhanced broadcasting services.
3. Extension of the joint ventures and strategic alliances to help extend their global reach,
particularly in areas such as North America, Europe, and Asia.
The Chairman stated that their status as a world leader in telecommunications was built on a
focus on the long-term development of continually improving its services to customers,
developing high-quality up to date products, and being innovative, flexible, and market-driven.
Business opportunities
The Chief Executive of XYZ Inc. has stated that the major opportunities for the company lie
in the following areas:
• Encouraging greater use of digital services, including making voice calls. Recent
research suggests that customers are sending more texts and making fewer voice calls
yet downloading more data.
• Provision of advanced services, and research and development into new technology,
including superfast broadband and systems integration, for example, making services
available on several digital platforms and making more use of the business ecosystem.
• The increasing freedom from government control via deregulation of markets in world-
wide telecommunications services.
The company has used an extensive television and poster advertising campaign. This marketing
campaign was designed to penetrate further the residential market by encouraging greater use
of the digital services with varying charging incentives being offered to encourage customers
to use the services more on a range of different digital platforms over fiber optic and superfast
broadband connection to their home.
Investment plans
XYZ Inc. is currently planning on making a multimillion-dollar investment in new products
that it believes will increase its market share in its domestic market. It currently enjoys a 55%
market share in its local market, having previously been a state-owned provider of
telecommunications services. It has been a private sector company for some years now, but the
competition has found it difficult to make inroads into their domestic market. XYZ Inc. plans
to make the most of this situation by investing in retaining the market share, if not increasing
it still further.
Industry regulation
Despite the deregulation in some part of the world, several western countries in which XYZ
Inc. has a relatively high market share presence, are strengthening the powers of the industry
regulators to promote competition and deter anti-competitive behavior.
Strategy and Management Accounting – Graham Simons Pitcher 23
Activity requirements:
You have been asked by the Supervisory Board of HW Inc. to prepare a report covering the
following points concerning XYZ Inc.:
(a) Explain the nature of the factors in the business environment, which will influence XYZ
Inc. in developing its business and increasing its market share [Hint: use PESTEL to
undertake a brief environmental analysis].
(b) To assess the extent of the potential market development opportunities available to XYZ
Inc. [Note: Apply Ansoff’s Product Market Growth Matrix to do this.]
https://managementaccountingandstrategy.com/ 24
Chapter 8 - Activity 16 – HW Inc. Investment appraisal and
stakeholders
HW Inc. is considering opening a new warehouse in the North of Belgium. Currently, the stores
in Antwerp and Aarschot are serviced by a warehouse just outside of Brussels. Building on its
expansion program of opening new stores in Turnhout and Hasselt, and establishing a hub and
spoke strategy to its logistics, the local management team of HW Brussels had been asked to
investigate the possibility of opening a new warehouse/depot just outside of Herentals. See
Figure 8.8.
One of the polices that HW Inc. has set is that for warehouses/depots to be beneficial, they
must not cost more than 7% of the revenue generated from goods sold in the stores that it
services and for which products pass through the depot. They usually are evaluated over five
years based on a net present value calculation using a discount rate of 5%, which represents
the relatively low risk attached to such an investment.
The main hub is based in Brussels, which is where the current sales from Antwerp and
Aarschot are serviced. The management team believes that it would be more useful to establish
a spoke so that a regional depot was supplied from Brussels, which then serviced the current
stores in Antwerp and Aarschot, and the new stores in Turnhout and Hasselt. The benefit is that
bulk deliveries can be made from Brussels to the regional depot, and smaller vehicles can then
be used to split the bulk for delivery to the local stores.
Figure 8.8 Map of Belgium
Current sales in Antwerp are €5.5m per annum and in Aarschot €4.5m per annum. Sales
have been constant during the last three years and are expected to remain at that level for the
Strategy and Management Accounting – Graham Simons Pitcher 25
foreseeable future. The stores do good business, but consumers tend to shop locally so, for
sales to grow, expanding the number of stores is the best strategy. However, once the new
stores are opened, it is expected that there will be some cannibalization of sales, that is, people
that visited the stores from Turnhout and Hasselt will now shop in the local stores. It is
estimated that the effect will be to reduce the sales in Antwerp and Aarschot by 5%. Forecast
sales for Turnhout and Hasselt together are expected to be €4.5m in the first year, growing by
10% (compound) a year for five years before stabilizing.
The cost of the new depot, land, and buildings is estimated to be €0.5m – a potential site
has been identified that could be ready for operations within a few months of the decision to
go ahead is made. Annual running costs are estimated to be €300,000 per annum, rising each
year by inflation of 2.5% per annum. There is local unemployment, so it is expected that labor
will not be difficult to obtain. A manager will need to be recruited at a salary of €25,000 per
annum, and 20 workers employed on a shift pattern earning an average of €15,000 per annum
– all salary costs are expected to increase by inflation. A forklift truck and 2 stackers (a smaller
version of a forklift truck) would be needed immediately at a total cost of €18,000. These will
be replaced at the end of five years with no residual value.
A fleet of 10 vehicles will be attached to the depot. A deal can be done with a local
dealership. The fleet of medium-sized box trucks could be acquired immediately on a five-year
lease rental, at a total cost of €250,000, covering the whole five year period. This cost includes
maintenance for five years and all operating expenses, subject to a maximum mileage of
100,000 miles for each vehicle within the five years. HW Inc. would need to supply the drivers,
who are each expected to earn €18,000 per annum – one driver per vehicle, The existing drivers,
have raised some concerns as they see this as potentially reducing their earnings because they
will be making fewer trips and the possibility of earning overtime could be reduced. However,
the senior management team of HW Belgium felt that opening the depot would be better for
the health of the current drivers and that there is less chance of them going over the maximum
driver hours allowed in any one day imposed by the EU.
The central senior management team (C-suite) of HW Inc. is keen to expand in Belgium
and is entirely behind the hub and spoke policy of distribution. There is some concern about
the impact of BREXIT, but the management team is keen to go ahead anyway. The local bank
is more than prepared to offer a competitive loan to finance the purchase of land, buildings,
lorries, and forklift trucks at an annual interest rate of 3% as the bank is keen to expand its
business with international companies. This cost of finance is not included within the current
cost of capital of 5% that HW Inc. typically uses to evaluate investment opportunities. The
local management team of HW Belgium feels that this would be the cheapest way to finance
the depot and would only use the finance for this project. They, therefore, suggest that the
marginal cost of capital of 3% should be used for evaluation purposes.
The local management team is also aware of local residents who have lodged a protest
against the proposed site due to the increased number of lorries on the local roads that will
result from establishing the depot. Half of the members of the local government (the local
council in the Herentals town) are keen to see the development go ahead as it will help with
employment. There is a re-election process due within the next six months, so HW Inc. is keen
to push for a decision before the local elections. A few councilors have suggested that they
https://managementaccountingandstrategy.com/ 26
would press for traffic restrictions to be put in place, that is, no early morning or late evening
deliveries.
The regional authorities (the municipality) are keen to see companies expanding in the
area that has the potential to stimulate the local economy and are likely to support the proposal,
providing the traffic issue can be resolved. The municipality oversees the local government but
traditionally has not involved itself too deeply in local decisions. For the development to go
ahead, HW Belgium needs approval from both the local council and the regional authority.
Several of the competitor stores are not so impressed and are likely to try and make life difficult
for HW Belgium stores to establish themselves in the new locations as the competitors try to
hold on to their market share.
Activity requirements:
(a) Undertaken a net present value calculation to establish whether the planned depot meets
the requirements of HW Inc. Also, state any assumptions you make and indicate any
other form of analysis that might be useful.
(b) Undertake a stakeholder analysis for the strategic decision to establish a depot in
Herentals. State the stakeholder group, their expectations, and the degree of power they
may have concerning the strategic decisions.
Strategy and Management Accounting – Graham Simons Pitcher 27
Chapter 8 - Activity 17 – HW Inc. Investment appraisal
HW to expand to a new country
HW Inc is planning to increase its business in the emerging economies. The management team
has identified Bangladesh as a potential country in which to open stores. Bangladesh is set to
be one of the top three fastest growing economies in the next few years. The country has a
robust financial sector, and one of the key industries is textiles, which is also a vital export of
the region. Its economy has grown on the back of exports of readymade garments.
Manufacturers in the region supply clothing to discount companies such as Matalan.
The local management team suggests that it will be possible to open a store in Dhaka and
have provided some initial estimates of start-up costs (for ease of use, these have been provided
in U.S.$). These are shown in Table 8.33. They estimate that it will take approximately one
year to gain the necessary permissions and establish the store, and trading would be able to
begin in the second year.
Table 8.33 Estimated costs and revenues for Bangladesh
$
Allowance for legal fees and local agent costs to be paid during the year of
set up
150,000
Annual rental of premises – it is anticipated that the premises will be acquired
4 months before the official opening to allow for fitting out the store and the
training of staff on the product ranges. 4 months’ rent will need to be paid
for this period.
300,000
Arrangement fee for property dealer paid before opening plus a commission
fee is payable each year equal to 1% of annual rental fee payable each year.
Note this is paid from the date of acquisition of the premises, that is, a 1%
fee is payable for the 4 months before the official opening
12,000
Fitting out of premises incurred before opening – treated as capital
expenditure
400,000
Recruitment and training of staff before opening 50,000
Marketing costs announcing the launch of the store before the official
opening
200,000
The initial investment in stock and working capital before opening – treated
as capital expenditure
250,000
Sales revenue in the first year of operation following the official opening,
rising by 10% per annum
3,000,000
A gross margin of 30% is anticipated
Operating costs per annum, following the official opening, including all costs
except rental of premises. These are expected to rise by 5% inflation in
subsequent years.
350,000
For the purpose of planning, assume taxation of 40% is payable on operating
cash flows and is paid in the year to which the charge relates. Legal fees and
agents’ fees are deductible expenses for tax purposes, and losses can be
carried forward.
Capital items are excluded from tax computations.
https://managementaccountingandstrategy.com/ 28
The typical evaluation for these projects is over five years of operation. The cost of capital is
estimated to be 6%.
Assume all costs and revenues occur at the end of the year.
Activity requirement:
Evaluate whether the Bangladesh store would be a viable proposition (undertake an NPV
calculation over 6 years, that is, year 1 set up, followed by 5 years of trading).
Chapter 9 - Activity 18 - HW Inc. Strategic implementation
The following activity refers to the HW Inc. case study in Appendix A of this learning resource.
The CEO has heard about the beyond budgeting round table. He and has asked you to put
together a briefing note on how beyond budgeting could be applied in HW Inc. And how it
could be implemented if the senior management were convinced of the benefits. You can
prepare the briefing as a PowerPoint presentation if you wish. [A briefing note is a short paper
that quickly and effectively informs a decision-maker about an issue].
Strategy and Management Accounting – Graham Simons Pitcher 29
Chapter 10 - Activity 19 – HW Inc. Balanced scorecard
Timothy Kinder (Non-executive director) has suggested that the balanced scorecard, as
developed by Kaplan and Norton, would be an appropriate model with which to monitor the
performance of the company in the future.
Activity requirement:
(a) Critically evaluate how the balanced scorecard model, developed by Kaplan and
Norton, will assist the management team of HW Inc. in assessing the company’s
performance.
(b) Illustrate for each business unit described below suitable objectives, performance
measures, and initiatives that could be used as part of a balanced scorecard approach
to performance management. [Note that you do not need an initiative for every
objective. Usually, one per perspective is appropriate to illustrate your
understanding].
HW Inc Retail stores
The retail stores are mostly high street stores, although HW Inc. is planning on opening an out-
of-town store in China where it has already been relatively successful with a small store in a
‘shopping village’. A shopping village is an out-of-town location where retailers have small
outlets that are often devoted to selling end of season goods and disposing of surplus
inventories. These are normally sold at a discounted rate to the latest products available in their
high street stores.
The retail stores have not been as profitable in recent years as the market has become
extremely competitive, and customers are becoming more sophisticated and demanding in their
expectations. One way in which HW Inc. has attempted to compete is always to offer the latest
products. This makes inventory obsolescence an issue, as judging the amount of inventory to
hold to satisfy customer demand, without having massive inventory write-offs, can be difficult.
This is a problem in the clothing market where products are seasonal, for example, summer
range, winter range, and so on. This sector is also heavily influenced by the latest fashions.
However, a new inventory management system is helping with the problem. The growth of the
‘click and collect’ service is working well and, along with online sales, is set to grow in the
future in all product groups.
The use of concessions (companies that effectively rent space in the HW Inc. stores) also
enables HW Inc. to provide a wide range of products to its customers. HW Inc. plans to try and
increase the number of concessions in the next few years as it shares some of the risks between
the partner companies. However, HW Inc. does not want to diminish the HW brand as they
also plan to continue to develop and sell their own brand products. They also wish to retain
their manufacturing capability as this provides a useful diversification from retailing and
https://managementaccountingandstrategy.com/ 30
enables more control over the quality of certain product lines in which they have a
manufacturing capability.
Clothing sales have been slowing in recent years, but the furniture sales are strong. The
electrical goods market is highly competitive, particularly the audio-visual and kitchen aids
ranges. The increased competition in the specialist electrical goods retailers has also hit the
departmental stores such as HW Inc., along with the need always to offer the latest products
highlighting the need for proper inventory management.
HW Inc. Interior Design
HW Inc. Interior Design has a range of corporate clients as well as retail customers. The design
team copes with a variety of projects from single room design such as kitchen design for
residential customers, to working with property developers and architects on both commercial
and residential large-scale projects. They source products used in their designs from HW Inc.
and several other companies. They have a large amount of autonomy over which products to
recommend and are not necessarily tied to HW Inc. However, they always consider HW Inc.
products and recommend them where they are suitable. This helps the HW Inc. research and
development team, who look after the HW Inc. product range, as the Interior Design division
can gather and feedback information about the products of other manufacturers, and also
customer trends.
The Interior Design team are keen to expand their business and are looking to increase the
number of corporate clients. In particular, they plan to target the state-owned and education
sectors over the next few years. To do this, they will need to expand their design team and
recruit additional staff with appropriate experience in those sectors.
HW Inc. Financial Services
The Financial Services division is seeking to increase the number of credit card customers over
the next few years and is also planning to diversify into insurance products. The division
already offers extended guarantees and insurance on products sold in the HW Inc. stores,
particularly on electrical goods, such as fridges, washing machines, T.V.s, and computers. The
management team is thinking of expanding into life insurance, travel insurance, car insurance,
and home and contents insurance. This is a competitive market, but they believe that the volume
necessary to breakeven on these products could be achieved if they can attract existing HW
Inc. customers and build on the reputation of the HW brand. It will then provide a stable
platform on which to expand the business in the future.
More recently, they have seen the administration costs increase, and the management team
have highlighted this as an area where improvements could be made, perhaps via a
benchmarking exercise. They also recognize that an increase in business will require an
increase in qualified staff, and by adding a range of new products, it will create the need for
additional training of the existing team.
Strategy and Management Accounting – Graham Simons Pitcher 31
HW Inc. Product development and manufacturing
This division has seen material costs increase in recent years, and they are looking at the
supplier relations to see if any savings can be made on the cost of materials. The division does
not see a significant increase in business over the next few years. Still, it is seeking to maintain
volumes at existing levels to retain the manufacturing capability, and within this to keep the
product range up to date. It means replacing existing product designs with more up to date
designs rather than developing entirely new product ranges.
They see the next few years as being a consolidation of the division. Control of costs will
be essential and reviewing manufacturing methods is seen as part of that process, but they do
not intend to spend a lot of new capital investment in plant and equipment. They feel that there
is scope to improve in areas such as waste management, energy costs, productivity, and
inventory management.
https://managementaccountingandstrategy.com/ 32
Chapter 10 - Activity 20 – HW Inc. Critical success factors and
performance management
HW U.K. is planning to expand its stores in the north of the country. The management team of
the HW U.K. subsidiary believes that there is scope to increase its overall sales by tapping into
some of the U.K. Government’s initiatives to stimulate the northern economy and, as the
regional politicians call it, create a northern powerhouse.
Currently, HW U.K. is well known in the south of the country, and, based on their
experience, the management team realizes that finding the right strategic location is a vital part
of success on the high street. Also, enjoying economies of scale from the size of operation can
aid cost management, and having the backing of a large parent company, which can provide
finance, also aids success.
Citigroup is a retail company that owns nine of the top 20 retail locations in the U.K. HW
U.K. has a store in the Citigroup held shopping center in Eldon Square, Newcastle upon Tyne
(see Figure 10.7) and in the Citigroup Braeland, Glasgow (Scotland) center. HW U.K. has been
in talks with Citigroup and understands that Citigroup is also keen to expand its presence in the
north, as well as increasing its overseas locations. Currently, Citigroup has locations in Spain.
Citigroup offers shopping amenities that generate high footfall (the numbers of shoppers
that enter a particular store) and long dwell times, that is, encouraging potential customers to
spend a long time in the shopping center due to the other amenities that are on offer, such as
food, and leisure activities. Both footfall, as well as purchase conversion rates, (which is the
number of shoppers that enter the store who purchase products), are crucial to retail success,
particularly when competitor stores are also present in the retail centers. This is highly likely
as the shopping centers occupy large sites with thousands of square feet of retail space.
Citigroup offers security, cleaning, environmental and technical services to their retail
tenants and is proud of their occupancy rates; that is, they have a remarkably high percentage
of retail units occupied in their shopping centers. It does not look good or inspire customers if
the shopping center has many empty retail units. The centers are equipped with the latest CCTV
technology that monitors people entering and leaving the centers, and movement around the
centers. The CCTV also monitors people moving and into and out of stores. The statistics are
available to retailers. Marketing research indicates that store layout is also a critical factor in
selling goods, and Citigroup can help with advice to new retailers.
HW U.K. has commissioned some marketing research to identify critical factors that will
help the success of a store. The marketing research company has provided a preliminary report
which included some interesting measures that they had identified.
The marketing research company has looked in detail at one of the successful HW U.K.
stores in the south of the country. The store in question is located in Bournemouth, a seaside
town. This is because the marketing research company had done some research for the local
authority in Bournemouth and already had some general data about the area. They also did a
detailed study of the HW U.K. store in Newcastle and of a significant competitor of HW U.K.,
which has a strong presence in the North of the U.K.. The competitor does not have a store in
Strategy and Management Accounting – Graham Simons Pitcher 33
Newcastle, so a store in Manchester was used as the comparison site (see Figure 10.7). The
information in Table 10.6 shows data for the three stores.
Table 10.6 Performance data collected by the marketing research company.
Measure
HW
Bournemouth
Located in
the High
Street in a
building
owned by an
independent
property
company
HW
Newcastle
Located
within the
Citigroup
Newcastle
shopping
center
Typical
major
competitor
store
located in
the
Citigroup
Trafford
center
Manchester
Customer satisfaction score out of 10 7.8 6.7 8.0
Passing trade – average number of people entering
the shopping center per day
10,000 15,000 20,000
Footfall – average number of people entering the
store per day
1,500 2,000 4,000
Point of purchase – average number of purchases
made in-store per day
400 450 1,000
Annual sales from the store £8.76m £8.0m £9.7m
Annual cost of goods sold from the store £6.12m £5.92m £6.79m
Average value of click and collect sales per annum £0.087m £0.16m £0.388m
Closing inventory value at the end of the last
financial year
£1.04m £1.776m £1.058m
Number of employees in the store 292 316 275
Square foot of retail space in store 40,000 sq ft 45,000 sq ft 50,000 sq ft
Average number of product ranges stocked in store 25,000 26,000 15,000
Annual cost of wages for store staff £4.38m £4.538m £3.947m
Opening hours of store 9:00 - 17:00
Mon – Sat
10:00 – 16:00
Sun
9:00 – 17:30
Mon - Sun
8:30 –
18:00 Mon
– Sun
Annual rental cost of the property (includes all
establishment costs such as security, cleaning,
maintenance, energy costs)
£10m £9m £10.5m
Unemployment rate in the region 1.8% 8.1% 7.4%
Population growth in the region p.a. 1.6% 2% 3.2%
Percentage of population of working age in the town 62.6% 68.5% 66.0%
Average annual income of population in the region £24,300 £20,862 £21,623
Average family household size 2.18 2.4 2.35
https://managementaccountingandstrategy.com/ 34
Activity requirements:
(a) What are the critical success factors for new stores?
(b) Based on the information provided, comment critically on the comparisons provided by
the marketing research company. [Points to consider include: How useful are the
comparisons to the management of HW U.K. in deciding on the success criteria for a
successful store in the North of the U.K.? Are there any reservations, concerns, or
questions you have about the comparisons provided? What could HW U.K. do to
improve the performance of its existing store in Newcastle? When undertaking this
activity, do not be afraid to use your own experience of shopping centers or common-
sense reasoning in thinking of ideas.]
Figure 10.7 Map of U.K. – note location of Bournemouth, Newcastle upon Tyne, and
Manchester.
Newcastle upon Tyne
Bournemouth
Manchester
Strategy and Management Accounting – Graham Simons Pitcher 35
Chapter 10 - Activity 21 – HW Inc. Economic value added
The senior management team (C-suite) of HW Inc. are understandably concerned about the
loss in 2020 and the potential continued loss in the 2021 financial year. Michael Holding, a
non-executive independent member, has suggested that HW Inc. should adopt the method of
performance reporting known as economic value added (EVATM). He explained that it was
developed by a firm of consultants, Stern Stewart, primarily as a way of measuring and
incentivizing senior executive performance, as well as benefiting the whole organization. The
focus is on shareholder value added, which he explained becomes a core part of the company
culture.
He has suggested that using EVATM could be beneficial for HW Inc. in identifying those
parts of the business that add the most value. The Finance Director has asked you to investigate
in more detail. Information is provided in Table 10.7.
Activity requirements:
(a) Critically evaluate the benefits and limitations of the Stern Stewart Consulting
organization’s EVA™ model.
(b) Illustrate how EVA is calculated by restating the results of the Products and Interior
Design areas of business using the figures and information provided below.
(c) Comment upon your results and state any reservations you have about the analysis
Table 10.7 Extracts from profit and loss and balance sheet relevant to EVA calculation
2018 2019 2020
Products
Interior
Design Products
Interior
Design Products
Interior
Design
$m $m $m $m $m $m
Profit/(Loss) before
interest and taxation 188.4 332.5 278.0 274.4 (91.5) 317.6
Taxation paid 45.0 79.4 67.6 66.7 5.4 67.4
The following costs have been extracted from the accounting information and were
charged to the profit and loss account as an expense
Depreciation 160.3 57.3 144.2 51.5 91.0 32.5
Research and Development 247.9 144.6 147.2 85.9 154.3 90.0
Marketing 322.8 271.8 234.8 177.7 222.3 158.8
Training 31.4 26.4 18.2 13.7 18.0 12.9
https://managementaccountingandstrategy.com/ 36
Balance Sheet
information
Net Assets 9,316.1 3,583.1 9,611.2 3,696.6 10,046.4 3,864.0
Notes:
Research and Development costs are to be written off over 3 years
Marketing costs are to be written off over 2 years
Training costs are to be written off in the year in which they are incurred.
The cost of capital of 6% is assumed.
Taxation is the actual taxation paid in each year.
Strategy and Management Accounting – Graham Simons Pitcher 37
Chapter 10 - Activity 22 – HW Inc. Transfer pricing The Interior Design business of HW sells its services to customers of HW Inc. The division
operates as a profit center and is free to recommend the best furniture, lighting, and kitchen
units, etc., to suit the needs of the customer. The way it operates is to essentially purchase the
units from the other divisions of HW Inc., either the factory or the stores, which it then sells to
the customer, adding its own design fee to the total price. There is a type of extractor that the
HW Interior Design division uses in its kitchen design. This device extract smells as well as
steam.
The unit is manufactured by a small factory that HW Inc. acquired last year. Recently a
dispute has arisen between the factory and the Interior Design management about the cost that
the factory wants to charge the Interior Design division for the unit. The factory is confident
that it can sell 100,000 units into the external market and has a capacity of 120,000 per year,
so it can sell 20,000 units to the Interior Design business without affecting its own demand for
external sales. However, the Interior Design business would like to buy 30,000 units. The
factory believes that because of the superior quality of the product compared to its competitors,
it will eventually be able to grow its external sales to the full capacity of 120,000 units within
two years.
The factory division has offered to supply the Interior Design division 20,000 units at a
transfer price equal to the normal selling price, less the variable selling and distribution costs
that it would not incur on this internal order. The Interior Design division responded by offering
an alternative transfer price of the standard variable manufacturing cost plus a 20 percent mark-
up on cost. The two divisions have been unable to agree, so the operations director of HW Inc.
has suggested a third transfer price equal to the standard full manufacturing cost plus a 15
percent mark-up. However, neither divisional managing director regards such a price as fair.
The information provided in Table 10.8 related to the factory forecast for next year.
Table 10.8 Factory forecast for next year.
$,000
Sales Revenue (100,000 units at $240.00 each) 24,000
Direct Manufacturing Costs
Bought-in materials 7,200
Labor 4,600
Packaging 800
Indirect Manufacturing Costs
Variable overheads 200
Line production managers 600
Depreciation
Capital equipment 3,000
Capitalized development costs 1,200
Total manufacturing costs 17,600
Sales and Distribution Costs
Salaries of sales force 1,000
Carriage 400
General Overhead 1,000
Total costs 20,000
Profit 4,000
https://managementaccountingandstrategy.com/ 38
Notes
1 The costs of the sales force and indirect production staff are not expected to increase
up to the current production capacity.
2 Depreciation for all assets is charged on a straight-line basis using a five-year life
and no residual value.
3 An outside contractor provides carriage.
4 Note that the factory has the capacity to produce 120,000 units per year.
The information above relates to the factory. The product can be sold in the open market for
$240. However, it is used within the Interior Design kitchen designs and therefore has an
“internal market” within HW Inc. There is a similar product of inferior quality in the open
market that sells at $180. At the moment the division has spare capacity but, as mentioned
earlier, the management of the factory believe that they will be able to sell many more in the
external market in future years and therefore may not be able to supply all of the Interior Design
business needs in the future if capacity remains at the same level.
Activity requirements:
(a) Calculate the three alternative transfer prices suggested by the managers.
(b) Advise management on the transfer price to charge if there are no capacity constraints
in the factory; that is, it can satisfy all demand from external customers and Interior
Design.
(c) Assume that there is now a capacity constraint in the factory and that they can only
manufacture enough to satisfy the external customers. What should be the transfer price
to Interior Design that would be in the best interests of the company as a whole?
Strategy and Management Accounting – Graham Simons Pitcher 39
Chapter 10 - Activity 23 – HW Inc. Benchmarking
Activity requirements:
(a) Critically evaluate benchmarking as a technique for improving the profitability of HW
Inc.
(b) Provide advice to the management of HW Inc. on the types of benchmarking that could
be used. Illustrate your answer with examples of areas of the business or activities that
could be benchmarked.
(c) Provide advice on the stages of conducting a benchmarking exercise in the context of
HW Inc.
(d) What other models and frameworks have you studied where benchmarking could be
used to aid the analysis.
Use the information provided on previous activities for performance management (activity 20)
and the balanced scorecard (activity 19) to help think of appropriate examples of benchmarking
for HW Inc.’s various business activities.
https://managementaccountingandstrategy.com/ 40
Chapter 10 - Activity 24 – HW Inc. Divisional performance RoI
and R.I.
(This activity is based on an old professional body examination question)
HW Inc. Product Development and Manufacturing (PDM) subsidiary division is organized on
business units that operate in different countries, that is, they primarily manufacture for the
local retail stores in the country, but allows HW Inc. to source products globally, and to
maintain a production capability in most of the continents in which it operates. Where possible,
they try and supply locally.
The management of the division assesses the performance of its business units in different
countries based on a target return on investment (ROI) of 10% (having set this target some time
ago in the belief that it is a good estimate of the cost of capital in the division). Overall, the
subsidiary division seldom achieved a 10% return, but one of its business units – the Indonesia
PDM Business Unit – which is a small unit, has repeatedly surpassed target performance, as
shown in Table 10.8.
Table 10.8 – Performance of PDM business unit
Year ROI
2020 22%
2019 20%
2018 20%
2017 18%
Table 10.9 shows the most recent results for the Indonesia PDM Business Unit.
Table 10.9 Recent performance of PDM division
Rp,m Rp,m
Revenues 540,000
Cash operating expenses 400,000
Depreciation 41,000
441,000
Direct Business Unit Profit 99,000
Business Unit Assets:
Opening balance 450,000
Currency is in Indonesian Rupiah and is shown in millions
Strategy and Management Accounting – Graham Simons Pitcher 41
Early in 2020, the Research and Development Division of HW Inc. head office was asked by
the Indonesia PDM Business Unit to evaluate the development of a new product range targeted
at the Indonesian market. The product has incredibly good prospects and is now nearing the
end of its development phase. As further development and introduction of the new product
would cost Rp90,000m, the HW Research and Development head office team believes that
Indonesia PDM should now take the project on board and reimburse the initial development
costs amounting to Rp30,000m. However, Indonesia PDM Business Unit management is
reluctant to pursue the project further because their forecasts and computations show that the
project is unlikely to produce returns of greater than 20% per annum.
Indonesia PDM estimates confirm that the new product would require an additional
investment of Rp90,000m and that this would generate additional revenue of up to Rp150,000m
per annum over seven years. Operating expenses are estimated at Rp118,500m per annum and
are exclusive of depreciation. HW Inc.’s internal group accounting practice is to depreciate
total expenditure on projects (inclusive of development costs) over the life of the project using
the straight-line method.
The senior management team (C-suite) at HW Inc. was surprised by Indonesia PDM’s
rejection of the project because of their belief in the market prospects of the new product. To
advise the senior management team at HW Inc. head office, you are required to analyze the
situation as follows:
1. Make calculations to confirm (or otherwise) whether the investment in the new product
is desirable for HW Inc., that is, the company as a whole. Would the Indonesian division
take a different view of the cash flows to be included, and what might their decision
be? (i.e., Calculate NPV using relevant cash flows, first from the viewpoint of the head
office, and secondly from the perspective of the Indonesian division).
2. Calculate Indonesia PDM Business Unit’s Return on Investment (ROI) and Residual
Income (R.I.) for (a) existing operations, (b) the new product, and (c) combined
operations.
(Use a table for this purpose with (a), (b) and (c) as column headings, and ROI and
R.I. as rows).
3. Make recommendations to the senior management team at HW Inc. head office and
comment on the results of the two measures of divisional performance measurement.
State which of the ROI or R.I. methods you would recommend.
https://managementaccountingandstrategy.com/ 42
Chapter 11 - Activity 25 – HW Inc. Sustainability
The following activities refer to the case study HW Inc. in Appendix A of this learning
resource.
Read the following description of a sustainable framework in operation.
[Note: The narrative has been adapted from a statement by Walgreens Boots Alliance, which is
the largest retail pharmacy, health and daily living destination across the U.S. and Europe, and
therefore the activities mentioned actually exist within a real organization].
Activity requirement:
Identify the aspects of the CSR framework described below that illustrate that HW Inc. takes
CSR seriously and note how the finance department is involved in the process of producing the
CSR report.
EXTRACT FROM CSR REPORT 2020
Our flexible framework
The Group’s CSR framework of priorities covers four key areas: community, environment,
marketplace, and workplace. We call this framework “the HW Inc. scorecard,” and it is used
across our businesses. Each of our businesses’ CSR plans is created based on local stakeholder
engagement, an analysis of key issues, and meeting the Group’s overall priorities. These are
presented to the social responsibilities committee for approval and progress against these plans,
and the scorecard is monitored centrally.
Community
We strive to support the communities in which we work. We provide our people with
opportunities to devote their time, energy, and talent to support the causes that matter through
volunteering and fundraising.
Environment
At HW Inc., we are determined to be a leader and an example to others in addressing the threat
of climate change. We pursue many practical activities which contribute to the overall
reduction of our carbon footprint.
Marketplace
Our mission to make people’s lives easier by providing quality products that help with
everyday life at reasonable prices comes alive through the relationships with or stakeholders in
the business ecosystem.
Strategy and Management Accounting – Graham Simons Pitcher 43
Workplace
As a Group whose purpose is to deliver products and services that help make people’s lives
easier and more comfortable, it is second nature to make the wellbeing of our employees a
priority. We continue to support our people through training and development so that they can
both grow professionally and meet the evolving challenges of our industry.
The HW Inc. scorecard
Every year, after consultation with our stakeholders, we review the Group’s priorities and,
where appropriate, set new revised priorities within which targets can be set for the year ahead.
Our priorities focus on developing links with the community (community), reducing our
carbon footprint (environment), sustainable products (marketplace), and healthy workplaces
(workplace).
All our businesses have their own scorecard based on these four key areas and, consistent
with the Group’s priorities, set their own programs and targets as appropriate. There is a range
of different strands of activity across each of the four key areas, and it is within this framework
that plans are made by each business. These priorities are further divided into areas of focus
and are apportioned around our ‘wheel’ structure (Figure 11.2), which is submitted to the HW
Inc. social responsibilities committee for review.
Figure 11.2 HW Inc.’s Sustainability wheel
We work across a range of retail product ranges, including furniture, garden equipment,
electrical goods, clothing, and financial services and interior design, as well as embracing
elements of manufacturing and distribution. Our businesses are of varying sizes and work in
https://managementaccountingandstrategy.com/ 44
different countries with different economic and social circumstances. As such, we have ensured
that our CSR framework is robust enough to provide leadership and direction, yet flexible
enough to consider differences in approach for each business working within the context of
their local communities and markets. It is necessary to have a support structure that helps each
business to develop and take ownership of a CSR agenda that is appropriate to local
circumstances while remaining within the overall HW Inc. framework.
Our corporate social responsibility management
As part of our CSR program, we have a “champion” in each business (country) with
responsibility for defining and delivering local CSR priorities and targets in line with the
Group’s overall objectives. These objectives provide a framework for our businesses to
establish their own priorities and targets that reflect the local business environment. Progress
against these targets is monitored quarterly by the Group, and a senior business leader is
accountable for each target.
Each “champion” works with an “action group” (which includes senior representatives of
relevant business functions) for his or her individual business, and the “champions” hold
teleconferences to share initiatives and internally report on their activity. They meet once a
year to share their skills, experiences, and ideas with their peers and members of the social
responsibilities committee. Formal and informal collaboration between “champions” helps us
to share best practices and ensures that our businesses can benefit from progress made across
the Group. For example, HW in the U.S. has worked in close partnership with HW in the U.K.
on an energy-saving campaign for all its sites, including warehouses and support offices.
All “champions” across HW Inc. are supported by the Group’s CSR Director and
coordinator, who provide guidance and additional expertise on working within the Group’s
CSR framework. In addition, each “champion” is supported by colleagues from their respective
business and a number of Group functions, including human resources, communications, and
finance.
In March 2017, we launched an innovative learning and development program to support
our corporate social responsibility “champions” with training on CSR theory and its practical
implementation, developed in conjunction with Birkbeck University, London. It aims to ensure
that each “champion” across the Group has a consistent knowledge and understanding of the
CSR agenda, combined with the confidence to manage and collaborate with internal and
external stakeholders. The program continues to thrive within the company with new
“champions” completing the program each year.
Data management process
We have a Group-wide approach to recording, measuring, and reporting on our CSR
performance. We have a set of reporting criteria and a set of CSR measures and performance
indicators that are applicable across the Group. The CSR data captured is used to inform and
assist in the development of each business’s individual CSR program.
The data presented within this report reflects the continuing operations of the Group. Data
collected locally are first reviewed by our CSR “champions” and finance teams at a local level.
Strategy and Management Accounting – Graham Simons Pitcher 45
The data is then signed off by the local country Finance Director. The Continent finance teams
then review this before being submitted to the finance team at head office, New York, and our
central CSR team for final review. Finally, the data is independently assured by our auditors,
KPMG, before publication in our annual CSR report.
Chapter 11 - Activity 26 – HW Inc. Sustainability and the
accountant
Sustainability has become a ‘buzz’ word of recent years. Discuss how the management
accountant can contribute to HW Inc. developing and maintaining a more sustainable approach
to business.